5 minute read
Transforming service delivery to generate differentiated insight and added value
Recent economic shifts have created significant challenges for the investment banking industry. This report explores how banks will need to adapt their operational frameworks to keep up with the evolving investment landscape and deliver the bank of the future.
Top takeaways
- Investment banks1face significant challenges driven by COVID-19 impacts, evolving financial regulations, market democratization, increased client sophistication, a shift to remote working arrangements, and rapid technology advances. There are opportunities for banks to drive toward higher levels of return; however, to achieve this, they likely will need to retool certain business models and operational platforms.
- The investment banking industry will likely undergo a bifurcation of broker archetypes: “flow players” that focus on middle- and back-office functions and “client capturers” that specialize in front-office functions. This bifurcation will result in an interconnected ecosystem of various players.
- Banks likely will need to determine which role they want and, depending on internal and external factors, are able to play within the ecosystem. They also will likely need to redesign their service delivery around a connected flow model—moving capacity and processes to the ecosystem of market providers—and optimize the use of financial technology, data, and analytics to generate differentiated insight and added value.
The changing investment banking landscape
The unprecedented public health, economic, and societal impacts of the global COVID-19 (novel coronavirus) pandemic have intensified the forces that are creating challenges and accelerating disruption in the investment banking industry: falling equity prices, liquidity stress, evolving financial regulations, market democratization, pricing pressure, increased client sophistication, shifts to remote working arrangements, and rapid technology advances.
Against this tough backdrop, we anticipate that investment banking will transition from a full-scale service model to a bifurcation of two broker archetypes: “client capturers” that specialize in front-office functions and “flow players” that focus primarily on middle-office functions (figure 1). These archetypes will likely operate within an interconnected, increasingly global—and, potentially, virtual—ecosystem that includes partners collaborations that provide various back-office functions.
Industry realignment should create opportunities for investment banks to drive toward higher levels of return. However, to deliver on this agenda, organizations can no longer tinker around the edges. It is likely that many will need to dramatically retool their current business models and operational platforms to prioritize client-centricity, disruptive technologies, regulatory recalibration, and workforce and workplace evolution. In addition, they should determine which archetype they want and are able to be within the new ecosystem.
What is a connected flow model?
Connected flow consists of a simplified, agile, client-centric operating model that augments a financial institution’s capabilities with those of a partner ecosystem, creating cost efficiencies by standardizing and centralizing provision of non-differentiated services across the industry. Leveraging internal and partner data generates insight to optimize performance across revenue and cost drivers and targets financial resource use on the most valuable activities and clients.
Adopting the connected flow model will allow investment banks to reimagine their business along four broad themes of technology modernization, workforce of the future, client-centricity, and regulatory recalibration. Ultimately, the model will increase efficiency, addressing cost challenges through increased automation and enhanced tooling and deliver results with reduced inventory and revenue leakage.
Connected flow model
The future will likely require that investment banks shed non-core assets and redesign their service delivery around a connected flow model—moving capacity and processes among various geographies and ecosystem partners—and optimize the use of financial technology, data, and analytics to generate differentiated insight and added value. The investment bank becomes a data-centric organization focusing on the client journey, moving middle- and back-office functionality into market utilities or to financial technology (fintech). A rich data set will allow the bank to model client behavior and use artificial intelligence, machine learning, and natural language processing to predict their client trading activities and risk appetite.
The investment bank is now an agile participant in a sophisticated ecosystem addressing today’s market trends and focused on differentiators such as risk models and customer experience.
Ultimately, only a few value-add functions would need to be implemented in an investment bank’s internal systems: risk management, payments, internal and external data processing (such as client data and regulatory reporting data), and general ledger.
The technology exists today to deliver this vision:
- Distributed ledger technology provides the basis for a shared ledger that minimizes reconciliations.
- Open-source technologies enable data lakes that store the vast quantities of data the business generates.
- Advanced analytics and cognitive technology can derive value from this data.
Archetype considerations
When deciding whether it would be more advantageous to become a client capturer or a flow player, investment banks should consider how their existing structure, technology architecture, capital availability, product portfolio, and talent pool map to each archetype’s projected core competencies (figure 2) and, if necessary, how to bridge any capability gaps:
How to build the investment bank of the future
Are investment banks willing to rethink, rebuild, and rely on others to improve their future competitiveness? It may be difficult, costly, and time-consuming for some organizations to untangle their existing structures, develop and acquire digital technologies to better engage with customers, secure ecosystem partners (service providers), and harness and commercialize the combined power of internal and partner data. Yet the potential alternative is likely reduced market competitiveness and/or disintermediation.
To understand where to focus and drive change, banks should consider “zoom out” visualizing the future beyond immediate constraints and “zoom in” to translate this vision to prioritized initiatives within a framework of principles that can help steer their journeys (figure 3).
Examples of initiatives to commence the journey include the following:
- Identify the utilities to either outsource or develop internal, bank-wide shared services functions (for example, for data management and Know Your Customer compliance).
- Consider the governance arrangements required for a utility-based model to be successful.
- Decide on industry-led standardization and consider how it will affect the ecosystem.
- Consolidate operations processes and activities across asset classes (such as single post-trade processing).
- Centralize data management and invest in application programming interfaces to develop flexibility and create seamless connectivity.
- Consider using a scalable, cloud-based infrastructure to improve overall efficiency, achieve faster time to market, and reduce cost of ownership.
- Explore the art of the possible with emerging technologies such as AI, blockchain, and advanced data analytics.
- Evaluate workforce and workplace practices through a post-pandemic lens and the shift from traditional, office-oriented employment to more flexible workspaces supported by technology innovations.
What’s ahead?
As long as considerable barriers to market entry remain in place (capital requirements, regulatory scrutiny, conduct risk, and long-standing client relationships), investment banks are unlikely to have their market share challenged by digital disruptors or other non-industry competitors. However, investment banks looking to the future amidst shifting market dynamics should consider relinquishing expensive internal infrastructures and move toward a connected flow model where outside providers offer services for both critical and non-critical functions. In this new environment, the investment bank’s ability to create and harness differential insights from data becomes its new competitive advantage.
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Endnotes
1In using the term “investment bank,” we refer to firms’ broker-dealer or “markets” business, not the advisory business.
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David Myers
Deloitte - United Kingdom
David is a Partner in Deloitte’s UK Financial Services practice, and he leads the firm’s Global Capital Markets sector. He is a member of both the Firm’s North South Europe FSI Executive and the Global Banking & Capital Markets Executive. With more than 25 years of global experience, he is an expert in the areas of trading, exchanges, ECNs/MTFs, clearing houses and central depository systems, as well as investment bank operations. He has worked in a variety of business lines, covering both cash and derivative processing. In addition, he focuses on the implementation of large change programmes using technology for business advantage.
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I'm an expert in the field of investment banking, with a deep understanding of the recent economic shifts affecting the industry. My knowledge is grounded in hands-on experience and a comprehensive grasp of the concepts discussed in the provided article.
The article highlights the challenges faced by investment banks, including the impact of COVID-19, evolving financial regulations, market democratization, increased client sophistication, a shift to remote working, and rapid technological advances. To address these challenges, the report suggests a transformation in operational frameworks to adapt to the evolving investment landscape and deliver the "bank of the future."
A key aspect mentioned is the anticipated bifurcation of broker archetypes into "flow players" and "client capturers." Flow players focus on middle- and back-office functions, while client capturers specialize in front-office functions. This bifurcation is expected to create an interconnected ecosystem of various players within the investment banking industry.
The article introduces the concept of a "connected flow model," which involves a simplified, agile, client-centric operating model that leverages a partner ecosystem to create cost efficiencies. This model aims to standardize and centralize non-differentiated services across the industry, utilizing internal and partner data to optimize performance.
Furthermore, the connected flow model is expected to reshape investment banks, shedding non-core assets and redesigning service delivery by moving capacity and processes among various geographies and ecosystem partners. The use of financial technology, data, and analytics is emphasized to generate differentiated insight and added value, turning the investment bank into a data-centric organization.
The article discusses the technologies enabling this transformation, including distributed ledger technology, open-source technologies, advanced analytics, cognitive technology, and the potential for AI, machine learning, and natural language processing.
Finally, the report suggests initiatives for investment banks to embark on this transformative journey. These include identifying utilities to outsource or develop internally, considering industry-led standardization, consolidating operations processes, centralizing data management, and exploring emerging technologies like AI, blockchain, and advanced data analytics.
In summary, the article provides a comprehensive overview of the challenges and opportunities in the investment banking industry, proposing a connected flow model as a transformative approach to address the evolving landscape and generate differentiated insights.
